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IBM Beats the Street As Promised

Big Blue doesn't disappoint.

Shares of business-class computing giant IBM(NYSE: IBM) are sliding more than 2% in aftermarket action in spite of impressive results.

Non-GAAP earnings jumped 15% year over year to $2.78 per share as revenue stayed flat at $24.7 billion. That's 4.5% ahead of Wall Street's earnings expectations and a rounding error away from meeting the consensus revenue target. Management also raised the official earnings target for the full year to $15 per share, just ahead of the Street consensus at $14.93 and up from the previous guidance of $14.85.

So Big Blue delivered on my vision of beating earnings targets once again. GAAP gross margins expanded to 45.1%, and the net margin also jumped. What's more, the company improved significantly on its one glaring weakness, as free cash flows soared 140% to $1.9 billion.

In short, there's absolutely nothing wrong with these results. IBM investors may have gotten a wee bit ahead of themselves in the buildup to this report, as the stock has beaten both the market and major rivals since the last quarterly checkup:

That's despite Oracle's (Nasdaq: ORCL)fine quarterly report last month. When Microsoft(Nasdaq: MSFT) reports on Thursday night, we'll know a lot more about the general health of enterprise computing. For now, the takeaway is that IBM happily trades lower hardware sales for more of the high-margin software and services revenue. That trade-off is good for margins and should reward investors as well in the long run.